A Senate investigation found that lax controls at Britain's biggest bank and its U.S. affiliate exposed the U.S. financial system to massive money laundering, drug trafficking, and terrorist financing risks due to poor anti-money laundering controls. While news reports indicate that criminal charges could be filed, many financial experts predict HSBC’s punishment will be limited to a hefty fine. This is a far different enforcement standard used by the government against American charities accused of having links to terrorism, many of which have had their assets seized indefinitely while investigations are pending. In some case, American charities have been shut down on the basis of much less evidence of wrong-doing than what the Senate report uncovered about operations at HSBC.
At the July 17, 2012 hearing titled, U.S. Financial System Vulnerabilities (video), the Senate’s Subcommittee on Investigations released a 340 page report finding regulators have been flagging major money laundering problems at HSBC for nearly a decade, but the London-based bank had continued its operations largely without penalty. Questionable practices included providing cash services to foreign banks that had connections with listed terrorist entities by the U.S., and skirting bans against financial transactions with sanctioned countries like Iran.
“Banks that ignore money laundering rules are a big problem for our country,” said Senator Carl Levin (D-MI), chairman of the subcommittee. “Also troubling is a bank regulator that does not adequately do its job.”
According to the Senate report, HSBC’s American arm, HBUS, served as “a gateway for terrorists to gain access to U.S. dollars and the U.S. financial system." In one case, HBUS supplied nearly $1 billion in cash to a Saudi bank closely connected to a Bangladeshi bank whose largest single shareholder at the time was International Islamic Relief Organization, a Saudi-based charity classified as a terrorist organization by the U.S. A second shareholder, Lajnat al-Birr Al Islamiah, was the precursor to the Benevolence Islamic Foundation, another charity listed by the U.S. as a terrorist group. The report reveals that HSBC compliance offers were aware of the red flags
, “but approved or maintained the accounts anyway.” [p. 245]
“HSBC actively circumvented U.S. safeguards designed to block transactions involving terrorists, drug lords, and rogue regimes,” the Senate report said. An independent audit, paid for by HSBC, uncovered 25,000 questionable payments with Iranian entities involving over $19 billion between 2001 and 2007.
HSBC executives counseled Iranian financial institutions on how to evade American regulation, and foreign HSBC affiliates substituted their own names for clients’ with Iranian ties to avoid raising suspicion [p. 140]. “While some at HBUS claimed not to have known they were processing undisclosed Iranian transactions from HSBC affiliates, internal documents show key senior HBUS officials were informed as early as 2001,” the report said. [p. 113]
The federal regulatory body in charge of enforcing anti-money laundering procedures, Treasury’s Office of the Comptroller of the Currency (OCC), also came under fire in the Senate report for “systemic weaknesses” in its oversight responsibilities. The OCC identified at least 85 problems with HSBC’s anti-money-laundering efforts from 2005 to 2010, but almost no enforcement action took place during that period. For example, in 2009 the OCC determined HBUS’s top executive in charge of anti-money laundering compliance was not qualified for the position. The OCC could have cited HSBC for violating federal law, but instead issued a letter listing the issue as a “matter requiring attention.” HSBC responded by hiring a new anti-money laundering official who reported to the unqualified compliance official. Other deficiencies included:
a backlog of over 17,000 alerts identifying possible suspicious activity that had yet to be reviewed; and
a failure to conduct money laundering monitoring of $15 billion in bulk cash transactions to HSBC affiliates before opening accounts for them
The Senate subcommittee found that the agency’s responses to these problems lacking. Calling the OCC a “lapdog not a watchdog,” Senator Tom Coburn (R-OK), accused the agency of seeing weaknesses in the bank’s money laundering safeguards and being “at a loss” to act.
Sandy Chen, a financial analyst at Cenkos Securities, predicts a monetary punishment for HSBC. “Because HSBC has cooperated with the U.S. Senate investigation, and because it has begun to implement the recommended changes, we think that U.S. legislators and regulators will be inclined to give HSBC some breathing space,” Chen said.
“I think we’re going to continue to see these types of gross violations of federal regulations intended to prevent money laundering until bank officials are held criminally accountable,” Jimmy Gurulé
, a former Treasury Department’s under secretary of enforcement from 2001 to 2003, said.
The report indentified several other major international banks that have received substantial fines in the last decade for major violations of U.S. law, including violating OFAC sanctions. “In December 2009, Credit Suisse was fined $536 million by the Department of Justice for altering wire transfer documentation from 1995 to 2006, in transactions involving Burma, Cuba, Iran, and Libya. That same month Lloyd’s Bank was fined $217 million for stripping information from wire transactions over a ten-year period, from the mid 1990s through September 2007. In May 2010, ABN Amro was fined $500 million for removing information from wire transfers involving OFAC sanctioned countries between 1995 and 2005.” [p. 116]